Living through a crisis is increasingly becoming the norm. With the war in Ukraine coming hot off the heels of Covid-19, putting further pressures on the already inflationary dynamics resulting from lockdown measures and supply chain shocks, the world has entered a new era.
OMFIF’s Autumn Bulletin looks at this new equilibrium. Alexandre Tombini, chief representative of the Bank for International Settlements in the Americas, explores the growing importance of emerging markets but warns against taking Latin America’s hard-won resilience for granted. The Asian Development Bank echoes this importance, with Roberta Casali, vice president for finance and risk management, tracing Asia’s rapid industrial development back to openness to trade and investment.
But all this has implications for the West. Europe is witnessing a new order following the UK’s departure from the European Union, the deployment of the Next Generation EU fund and the war in Ukraine. In the US, a strong dollar and growing protectionist sentiment seems to foreshadow an increase in global economic fragmentation, as Mark Sobel, OMFIF’s US chair, points out.
This edition of the Bulletin builds on themes that emerged from a meeting OMFIF held in Paris to discuss the future of the euro area. Questions were asked about Italy’s new government and the implications for the transmission of the NGEU, alongside the interplay between monetary policy and fiscal support. The predictions from the International Monetary Fund, European Stability Mechanism, European Central Bank and the European Commission, among others, were that inflation would be at 2% by 2024, with Europe heading into a recession in the interim.
In determining how to navigate these new realities, the ECB has added its transmission protection instrument to its monetary policy toolkit. But questions remain on how, or even if, the TPI will be triggered. Markets seemingly have been calmed, but if Italian spreads widen further and the ECB does not act, then it is unlikely this calm will last.
Other concerns raised included the tension between the US and China and the focus on what US Treasury Secretary Janet Yellen called ‘friend-shoring’. Elliot Hentov, head of policy research at State Street Global Advisors, writes in the Bulletin that the trend towards protectionism increases the cost of global trade, pushing up inflation and jeopardising the 2% target. While this move to protect and shore up key industries and invest in the green transition will build long-term resilience, in the short term protectionism may cause more problems.
Balancing inflation, recession and an uncertain world embroiled in trade tensions, wars and the persistent impact of Covid-19, policy-makers, central bankers and financial institutions are increasingly aware of geopolitical pressures on their decision-making. The OMFIF Bulletin looks to explain, consider and bolster thought on how we manage this new normal of multiple crises, when we should also be looking longer term to build up resilience against climate change.
These themes were also raised at the most recent meeting of the OMFIF advisory council. The diverse experience in the room sought to look further than the immediate concerns around navigating high inflation and the reality of a global recession. Members observed that the security and economic sectors should be more intertwined as global uncertainty can wipe away economic forecasts – shown by Russia’s invasion of Ukraine.
We face a new paradigm. The world is beginning to look to what happens after central banks tighten their policies, inflation reaches the target 2% and governments increase their debt burden. Will we be in the same world as before Covid-19? Or will we be more divided, facing new challenges of technological innovation and weaponisation of data? With the threat of higher trade barriers, will institutions have to reconsider how they are governed?
OMFIF will continue to navigate discussions on the role of central banks and public institutions in rising to these challenges. The advisory council suggested the world will look very different to now. The Bulletin asks this same question: has the world fallen out of love with globalisation?
Ellie Groves is Managing Director of OMFIF’s Economic and Monetary Policy Institute.